If Exelon loses its case against the IRS in U.S. Tax Court, tax-free property exchange deals, even smaller ones, could be at risk of more often being labeled "abusive tax shelters," by the agency, tax lawyers said this week. ... Exelon is defending two tax-free property exchanges worth more than $1 billion combined. They were carried out by one of its units in 1999, according to a Tax Court filing. ...

In the Exelon case, the IRS is arguing that the company "did not acquire and retain significant and genuine attributes of a traditional owner," to satisfy the like-kind exchange rules, according to court documents.

The case traces back to 1999 when an Exelon subsidiary sold some of its fossil fuel power plants to comply with new regulations. With the sale proceeds, the subsidiary acquired three power plants in Georgia and Texas in what the company said it structured as a tax-free exchange. The Exelon subsidiary then leased the Georgia and Texas properties back to the local governments that operated them. The governments paid advance rent to the Exelon unit totaling more than $1 billion, according to court filings.

The rent payments were part of a "sale in, lease out," or SILO, deal that was integral to the tax-free exchange.

The IRS contends that by leasing the properties, the Exelon unit did not take proper possession of the plants it got in the exchange. The IRS views some SILO deals as tax shelters and has won SILO disputes in court, including an unrelated one against Exelon last year in a federal appellate court.

"SILOs are old tax shelters and courts have ruled against them numerous times," said Bradley Borden, a Brooklyn Law School tax professor. He added that if the SILO portion of the power plants exchange does not hold up in court, Exelon could lose and its case could have "a chilling effect" on similar deals. "Exelon is going to have a hard time winning," Borden said.

However, in court fights over like-kind exchanges, "the IRS has a pretty bad track record," said David Shechtman, a lawyer with Drinker Biddle & Reath LLP who is not involved in the case.

Exelon's transaction was not a typical SILO and that might help the company prove it was playing by the rules, he said.